There’s no question what is top of the agenda for investors this week as China and the US square up to each other with tit-for-tat trade tariffs. The latest escalation of trade tensions has hit markets around the world and sent investors in search of safe havens.
Both sides in the unfolding trade war are sticking to the script. Presidents Xi and Trump are seemingly enjoying playing the strong-man and there is no sign of either of them blinking in the short run.
It’s only four days since the US increased tariffs on $200bn of Chinese imports from 10% to 25%. But already we have seen China retaliate with matching hikes on $60bn of US exports and America return fire with the promise that it will bring another $300bn of trade into the net.
That would impose a 25% levy on effectively all of China’s exports to the US. It is surely only a matter of time before people stop talking about trade tensions and start describing this stand-off as a full-blown trade war.
No-one wins a trade war, whatever President Trump says. China is a clear loser but so too will be many US businesses. It’s bad news for global trade but the two main protagonists will suffer more than the rest of the world. That’s why, unusually, big falls in US stocks have not yet translated into similar declines in other markets like our own.
Slides in the value of Apple, Boeing and Caterpillar shares reflect their exposure to international, especially Chinese, sales.
There remains a degree of uncertainty about whether the higher tariffs will actually be implemented. The US deliberately levied the higher rate on shipments leaving China from last Friday onwards. That provides some room for last-minute negotiations during the two to four weeks that the containers are crossing the Pacific.
Likewise, the Chinese tariffs will only come into effect from 1 June. Both sides are leaving the door open for a late deal.
But investors are not taking any chances. The 2.4% drop in the S&P500 index on Monday this week was the worst fall since January. Chinese shares fell 4.5% last week and have dropped further on the first two days of this week.
The escalation of the trade rhetoric will put clear pressure on the Federal Reserve to ride to the rescue. The rally in shares since the start of the year was premised on two hopes - lower interest rates and a resolution of the trade spat. The Fed looks to be the market’s best hope now.
That is why financial futures are now pointing to a 75% chance that the next move in US interest rates will be down. Donald Trump must hope so. He can ill afford a pre-election recession next year. Especially as the areas hardest hit by manufacturing and agricultural strains are typically Trump-voting regions.
Attention is now focused on the G20 summit next month in Japan. A deal there would allow both the US and China to move on. They both want to do so but they need to be able to leave Tokyo with their heads held high. They are walking a diplomatic tightrope.
How should we respond to today’s rising trade tensions with our investments? With caution is the short answer. The outcome of the trade talks is binary. A deal could see investors rapidly regaining their risk appetite. The bounce back could be strong. But equally no-deal would knock growth in the world’s two biggest markets. That is almost certainly not fully priced in.
The good news is that a well-diversified portfolio will mitigate the impact of a trade war to some extent. With investors seeking out safe havens like Treasury bonds and gold, a multi-asset portfolio can handle some weakness in the US and Chinese markets. The performance of the UK stock market, for example, has been notably smoother than either so geographical diversification helps too.
The Select 50 list of our favourite funds provides a handy short-list of funds across multiple asset classes and geographies. For investors who prefer to manage their own asset allocation and to choose their own preferred fund managers, this is a great starting point.
If you are less confident, or simply want someone else to do the work for you, the Fidelity Select 50 Balanced Fund is a one-stop alternative to a DIY investment approach. The Fidelity Select 50 Balanced Fund is managed by Ayesha Akbar, one of our most experienced fund-of-fund managers. She has been in charge of the fund since launch in February 2018 and has delivered a smoother ride than the overall markets in the past 15 months, although the past is obviously no guide to the future and the track record of the fund is still too short to draw any reliable conclusions.
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Past performance is not a reliable indicator of future returns.
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